Wednesday, 25 February 2015

Aer Lingus Watch #5

Paul Sweeney: I began Aer Lingus Watch 3 by saying that the government will not sell its stake in Aer Lingus. The Taoiseach had said that he wanted “a cast-iron guarantee” on the slots from IAG. That will not be forthcoming, I said. Cast-iron means no, if it is plain English because such a guarantee can't be given and enforced. And I thought the case was closed. For a time it appeared as if it might be opened again when a few key players in positions wavered. But the government has now sensibly rejected this bid.

That is not to say another won't materialize.

Tuesday, 24 February 2015

Why ‘gross’ income inequality matters

Cormac Staunton: Cherishing All Equally has prompted a discussion of economic inequality in Ireland. In a previous post I discussed why looking only at incomes is insufficient, and why we also need to look at public services and the cost of living.

In this post I want to show that when talking about income in the context of economic inequality it is important to look at gross income inequality (before taxes and social welfare), not just net income inequality (after taxes and welfare).

Friday, 20 February 2015

Five Progressive Views on Greece

Nat O'Connor: Queries: The European Progressive Magazine circulated five articles about the Greek crisis, all of which are relevant to Ireland.

More on Ireland's Low Taxation and Income Tax Progressivity

Nat O'Connor: The OECD provides a table of its member states showing total tax revenue as a percentage of GDP. In 2012, Ireland's total tax revenue was 28.3% of GDP. The lowest in the OECD was Chile on 20.8%. The highest was Denmark on 48%. Of all EU members of the OECD, Ireland has the lowest total tax revenue.

Ireland's low overall taxation is mostly due to very low social insurance charged on people's incomes. As shown in the three charts below, people on low and average incomes in Ireland pay much lower taxes than what they would pay in other countries. People on above average incomes pay less tax than they would pay in European countries, but slightly more than they would pay in English-speaking countries (including the UK).

Thursday, 19 February 2015

Aer Lingus Watch #4: Did Privatisation Make Aer Lingus Profitable?

Paul Sweeney: A number of commentators have claimed that privatisation was the best way for Aer Lingus and that it was the making of the company because it became more profitable. The facts demonstrate that this is patently not true.

Timmy Dooley of Fianna Fail defended that party’s un-strategic decision to privatise Ireland’s strategic aviation bridge to the rest of the world, claiming that the company had performed poorly before it was sold off and he claimed that it has done better since their mistake of privatisation.

Wednesday, 18 February 2015

Getting Beneath the Surface of Gross versus Net Income Inequality

Nat O'Connor: TASC's new report, Cherishing All Equally: Economic Inequality in Ireland, is designed to provoke deeper debate about what is and is not working in Irish economic and social policy.

The report points to the international debate on the problematic growth of income and wealth inequality to show that the issue is important and needs to be talked about in a different manner. Part of the problem in Ireland is that any mention of inequality is treated as left-right politics as opposed to a description of a major social or economic problem that merits serious analysis by everyone in the political spectrum. (An 'inconvenient truth' about our economy perhaps?)

Super rich or super angry: where are you on Ireland’s income pyramid?

Paul Sweeney: Many of us did not care how much others earned during the Celtic Tiger and bubble years. But now we are rightly angered about growing inequality.

How do your earnings compare to others? For the 1.9 million people at work last year, average annual earnings were €35,600. But it’s a bit more complex. This Central Statistics Office (CSO) data does not include many of the highest paid, e.g. many sole practitioners, doctors, accountants or solicitors in partnerships, nor the incomes – including gains made – of the very wealthy.

Tuesday, 17 February 2015

IAG: Predator or Saviour?

An Lámh Eile: Once again the full privatization of a state company is on the agenda.

Much is being made of connectivity. Connectivity is an issue for two key segments, tourism and business. But will connectivity be affected by an IAG takeover? There is substance in the comments that argue that if the demand is there for connectivity, the market will provide it. And if that is true, the IAG takeover of Aer Lingus is immaterial to connectivity. Private airlines decide on the basis of the bottom line in initiating a new route or further development of an existing one. In the short-term, the bottom line rules in the market. But are there cases where loss-making connectivity should be sustained for some long-term broader reasons than short-term profit?

Monday, 16 February 2015

Ireland's 'Progressive' Income Tax System

Nat O'Connor: Some commentators keep referring to the progressivity of Ireland's income tax system, as if it was the silver bullet that makes economic inequality in Ireland OK, or at least as good as it can get. This is vastly over-simplified.

Focusing in on the effect of income tax, USC and PRSI, the progressivity in Ireland's income tax system is real - but it is NOT due to taxing high incomes more than in other EU countries.

Response to Dan O'Brien's 'Bunkum' Article

Nat O'Connor: Dan O'Brien writes that "claims about great inequality in Ireland are just bunkum". Having had a look at the arguments in support of this position, there is much data Dan O'Brien is ignoring.

DOB: "it has always been clear from the available data that the gap in Irish incomes between the richest and the poorest at any given time has been in line with averages in peer countries."

We have data on the Gini coefficient of overall income inequality, which shows us that it is slightly lower than the EU average. But this statistic doesn't give us fine detail about the mix of high, low and and middle incomes across society. Different countries can share the same overall level of income inequality, but have different combinations of high and low income.

Inequality: a Real and Growing Threat to the Irish Economy

Nat O'Connor and Cormac Staunton: Economics has always been about the study of who gets what, when and how. This issue has come into sharp focus due to the problems that growing economic inequality is causing. International bodies like the OECD, World Bank, IMF and World Economic Forum have all stressed the challenges and risks posed to developed economies by economic inequality. Economists and leaders across the spectrum have called economic inequality ‘dangerous’ (free market advocate Alan Greenspan), ‘the most important problem we are facing today’ (Nobel laureate Robert Shiller), and ‘the root of social ills’ (Pope Francis).

TASC’s first annual report on economic inequality, Cherishing All Equally, shows that this global phenomenon is a very real threat for Ireland too.

Friday, 13 February 2015

The “Two Irelands”

Cormac Staunton: Christian Aid hosted a conference in Dublin yesterday on the “Human Rights Impact of Tax and Fiscal Policy”. There were a number of interesting speakers and contributors on issues of global tax policy and how it links with human rights, sustainable development and equality.

In this post I want to focus on a discussion between two panelists that I found particularly interesting. To many of those present it might not even have been the most interesting discussion in that session. But to me it spoke volumes about the central importance of inequality.

Wednesday, 11 February 2015

Economic Inequality: More than Incomes and Wealth

Cormac Staunton: When discussing economic inequality, there is a tendency to focus on income inequality (or sometimes wealth inequality). This is because there is more data on incomes, and income inequality can be (over) simplified with measures like the Gini Coefficient.

However, economic inequality is about more than just incomes and wealth. TASC’s forthcoming report, Cherishing All Equally, is the first study to take an overall view of economic inequality in Ireland. To get a full picture of economic inequality we need to look at a range of other factors, a few of which are discussed here.

Tuesday, 10 February 2015

Immigration: wishful thinking by well-meaning people (4 of 4)

James Wickham: Here the argument is brought to a conclusion, with a full list of references. [Part 1 of these four posts is here]

4. The moral case for immigration
Today in most European countries large scale immigration in its current form probably increases social inequality.

The fiscal arguments for continued large-scale immigration involve enormous social change and heavy resource pressure for at best marginal benefits. Not all European countries face population decline, so in these cases (UK, France, Scandinavia) the demographic arguments are grossly exaggerated.

Monday, 9 February 2015

Immigration: wishful thinking by well-meaning people (3 of 4)

James Wickham: The focus in this post is the debate about the benefits of diversity. [Part 1 of these four posts is here]

Problem #8 Not all kinds of diversity create innovation
In his paper, FitzGerald repeats the mantra that immigration creates diversity and so stimulates innovation. He explicitly states that one cause of London’s economic dynamism is its cultural and ethnic diversity, the result of recent immigration. Since ‘innovation’ is seen as fundamental to economic growth, here we have a new and separate economic rationale for immigration.

What is astonishing about this argument is that it is taken as self-evident by commentators, yet the actual empirical evidence is very limited. Since economic growth generates in-migration, there is an obvious possibility that diversity may be a consequence of innovation, not its cause. One detailed analysis of the impact of immigration on the London economy could find no evidence for the claim that the resulting diversity has increased innovation (Gordon et al 2007: 59); a more recent study using firm level data reports a small but significant ‘diversity bonus’ across all types of firms in London (Nathan and Lee 2014).

Certainly, the contribution of specific immigrant groups to innovation is well known historically, from the Huguenot refugees of the 17th century (in Ireland, England and Prussia) to the East African Asians of the 1970s in Britain; the contemporary contribution of Chinese and especially Indian migrants to innovation in Silicon Valley is also well documented (e.g. Saxanian 2006).

In the UK in particular the contribution of so-called ethnic entrepreneurship has been discussed for some time. We can also recall cities of the past such as Alexandria, Salonica or Odessa, known for economic dynamism and for their polyglot and ethnically diverse populations – and now of course homogenised by nationalism and/or religious fundamentalism [1].

However, neither the specific contributions of specific groups nor the peculiar features of entrepôt cities prove that diversity in itself heightens innovation. The next section shows that there are equally plausible arguments that diversity lowers social capital, and given that trust is often seen as crucial for innovation, it could even be argued that immigration is bad for innovation [2].

3. Quite apart from some rather more fundamental sociological problems
The economic ‘benefits of diversity’ thesis is interwoven with the more general if much vaguer belief that diversity is anyway a Good Thing. Nobody now wants to be against ‘diversity’. Recently however this comfortable assumption has been challenged.

Since World War II, European nation states became welfare states. Whereas in the past (male) citizens were defined by their obligation to fight for the state (‘Aux armes citoyens’ in the Marseillaise, ‘The Soldier’s Song’ for Ireland) now they are defined by their involvement in the systems of mutual support (education, health, social welfare…).

And the welfare state actually makes greater demands of its citizens, because it asks them to pay for each other, to look after each other, and to contribute towards the next generation. Although the welfare state involves some ‘vertical’ redistribution (from the rich to the poor), it also involves massive ‘horizontal’ redistribution, from those at work to those either too young or too old to work. The welfare state therefore makes enormous demands on all its members. It is plausible that the more diverse – the more not like me fellow citizens are – then the greater this unwillingness.

Furthermore, where integration occurs through the recognition of difference (‘multi-culturalism’ [3]) rather than through assimilation, this will further weaken this readiness to fund one’s fellow citizens now and in the future.

Such arguments are supported by historical research and by work in political economy. Thus a landmark study of American distinctiveness argues that in the USA, where ethnic or ‘racial’ divisions are strong and politicised, welfare is seen as transferring resources to ‘them’ and has little political support; conversely, the most advanced welfare states in Europe, those of Scandinavia, were built when these societies were remarkably homogenous in terms of religion and ethnicity (Alessina and Glaser 2004).

This general argument was reinforced in a much cited paper by Robert Putnam (2007). Putnam argued that diversity (measured in terms of ethnic origin) leads to what he termed ‘hunkering down’: in diverse areas social trust is lower, not just between the different groups but also within them.

Putnam was careful to stress that new identities can be created from diversity, so that diversity can diminish and trust rise – but this of course is the opposite of the Diversity is Good For You argument. It is after all worth noting that the integration of America’s European ethnic minorities occurred from the 1920s through to the 1960s – the period when there was an effective ban on mass immigration. There is also strong evidence that the combination of multicultural policy and easy access to generous welfare provision works to marginalise ethnic minorities, as measured by low labour force participation and over-representation within the prison population (Koopmans 2008).

Such views are not accepted by all researchers. Others have argued that a strong social democratic tradition can insulate European societies against these fissiparous tendencies (Tayor Gooby 2005).

All of these issues are the subject of extensive debate, but there is now enough historical and social science evidence to suggest that at very minimum diversity, social cohesion and social solidarity are uneasy bedfellows. Probably progressives face a stark choice:

This is America versus Sweden. You can have a Swedish welfare state if you are a homogenous society with intensely shared values…In the US you have a very diverse, individualistic society where people feel fewer obligations to fellow citizens. Progressives want diversity but they thereby undermine part of the moral consensus on which a large welfare state rests (David Willetts in 1998 quoted in Goodhart 2013).

On this basis it’s hardly surprising that the most explicit advocates of continued extensive mass immigration are on the one hand, the lobbyists for multi-cultural policies and on the other hand, advocates of the deregulated free market [4].

[1]The ethnic purification of Salonika (contemporary Thessaloniki) is the theme of the masterful account by Mazowerer (2005). Arab nationalism and now Islamism have largely homogenised Alexandria; the holocaust and Stalin’s ethnic sorting after World War II achieved similar results for Odessa.
[2] Consider here the experience of the ‘third Italy’ based on the innovative small businesses of Emilia-Romagna and Tuscany. Immigration has changed the workforce and undermined one basis for innovation (Andall 2007).
[3] ‘Multiculturalism’ can mean many different things. In everyday parlance in the English-speaking world it now usually just means tolerance. However, multiculturalism as policy means far more than this. It means the acceptance of different communities and their institutions as part of public policy; it will be supportive for example of different education for different minorities and recognition of other languages than the national language. For key early discussion of the problems of multi-culturalism as policy see Joppke (1999).
[4] As exemplified by Philip Legrain’s polemic Immigrants: Your country needs them (2007).

Click here for Part 4

Friday, 6 February 2015

Immigration: wishful thinking by well-meaning people (2 of 4)

James Wickham: To continue the analysis, looking at broader demographic and labour market issues. [Part 1 of these four posts is here]

Problem #4 The small demographic benefits of immigration depend on massive population change
It is frequently argued that Europe needs immigration because the European populations are ageing and without immigration the population will actually decline. In fact this is only half-true: some European countries do face population decline, but not all. Furthermore, the most serious declines are not in Western Europe, but in some countries of the former Soviet bloc where the ‘transition’ to a market economy has had disastrous consequences for living standards of ordinary people. In Western Europe, the UK and France in particular do not depend on immigration to maintain their population size, the issue is most important in Germany and above all Italy.

In the UK, immigration is now the major cause of population growth. For the ‘aging population’ argument the crucial figure is the dependency ratio (the number aged over 65 per 100 aged 16-64). Recent ONS projections assume an annual net migration to the UK of 165,000 [1]. This would result in the population rising from 63.7m in 2012 to 73.3m in 2037 and to fully 86.5m in 2087. In this population the dependency ratio would rise from 26.5 in 2012 to 41.9 in 2037 and to 51.5 in 2087.

Similar projections have been made for the hypothetical situation of zero net annual migration, in which population change is purely the result of births and deaths. In this situation the total population would stay roughly stable (67.5m in 2037 falling down 40 63.8m in 2087). Nonetheless the dependency ratio would rise to 46.2 in 2037 and 61.2 in 2087. Under ‘low’ net migration (100,000 p.a.) the population would still reach 71.6m in 2037 and 80.1m in 2087; under ‘high’ net migration (225,000 p.a.) population would be 75.0m in 2037 and fully 92.9m in 2087, with corresponding dependency ratios of 40.8 and 50.5 (Rowthorn 2014: 32).

Such projections show three crucial points. Firstly, slowing the rise in the dependency ratio requires continued inflows of new migrants and consequently a significant increase in total population. Secondly, reducing the dependency ratio back to anything near its current level cannot be achieved even by completely unprecedented levels of immigration. Finally, continued high levels of immigration would accelerate the ongoing ethnic transformation of the UK and it is difficult to imagine that this will be politically acceptable (Coleman 2010).

All of this assumes that the fertility will remain well below replacement level. However, it is clear that most women in Europe already have fewer children than they would like to have – the so-called ‘child gap’ (Bernardi 2005). There are rather well known policies that can facilitate child-rearing, the most obvious being (a) flexible employment that allows women – and men – to combine parenting with paid labour and (b) adequately funded and publicly available childcare (see Castles 2003). Through such measures the Nordic welfare states have ensured that fertility rates are at approximately replacement level (e.g. Ellingsaeter 2011). Conversely, it is clear that unemployment and employment insecurity make people less likely to want to become parents (Pailhé and Solaz 2012; Vignoli et al 2012).

Finally, there are some obvious reasons to reject the conventional wisdom that the population of European countries needs to grow (Coleman and Rowthorn 2011). Growing populations impose high environmental costs, especially if the population is also affluent. Indeed, there are strong ecological arguments in favour of some reduction of population size over time. There is evidence that growing population is already experienced by some Europeans as damaging their quality of life: population pressure on the environment (‘overcrowding’) is now one reason Europeans give for emigrating (Van Dalen and Henekens 2013) [2].

Problem # 5 Immigration reduces need for training
In the UK there is a growing suspicion that the immigration of skilled labour has reduced the pressure for effective education and training (House of Lords 2008: 31; Ruhs and Anderson 2010: 313). A ready supply of skilled immigrants may make employers less concerned to retain existing skilled employees.

Skilled immigration is a policy option for both employers and governments, a choice to ‘buy not make’. This is a counter-factual argument and difficult to actually prove. However, scholars working within the ‘Varieties of Capitalism’ tradition stress that one feature of Liberal Market Economies, such as the UK and the USA, is that they invest relatively little in occupational training: these countries are also those most prone to facilitate the importation of skilled labour (Devitt 2011).

Despite all the rhetoric of the knowledge society, countries such as the USA, the UK and even Ireland can become dependent on the importation of skilled labour in the IT sector (Wickham and Bruff 2008; Salzman et al 2013; Wickham 2015). Even more problematic is the dependence of the health systems of such societies on the importation of expensively trained medical professionals from poorer countries [3].

Problem #6 Mass immigration can substitute for inclusive labour market policies
Mass immigration may well also function to reduce the pressure for inclusive labour market policies. Most European countries have faced the paradox of high unemployment, especially youth unemployment, and mass immigration into low paid jobs. One review of the literature concludes that there is quite strong evidence that immigration discourages workless natives from entering or remaining in the labour market; comparing Europe and the USA it concludes that effect on wages is larger in the USA, whereas the effect on employment is bigger in Europe (Longhi et al 2008 as cited Rowthorn 2014: 21). What exactly could be involved in this ‘employment effect’ needs further discussion.

Here the experience of the recent ‘Celtic Tiger’ boom in Ireland is relevant. The boom involved a significant expansion of employment within the existing population and a sensational inflow of immigrants, largely from the New Member States of the EU. I have described this as a ‘goldrush’ or ‘bubble’ labour market’ (Wickham 2015). The employment rate also increased for groups with traditionally relatively low employment, namely older people and above all for women.

However, this ignores that at the same time unemployment blackspots continued: unemployment remained high in areas of the North West but also in areas of booming Dublin. Many women continued to leave the labour market after their first or especially their second child, so that labour force participation amongst ‘native’ women only reached moderate European levels. All of this is hardly surprising, for Irish labour market policy was essentially one of benign neglect combined with cash handouts.

On the one hand, cash benefit levels were generous by European standards (and significantly higher than the UK) and universally accessible. On the other hand, labour market activation measures (counselling, repeat interviews, job search support) were almost non-existent (Grubb et al 2009). Even more importantly, there were almost no measures to support groups who traditionally have been most likely to become detached from the labour market – the disabled, the less educated, etc. And after literally decades of debate, nothing was done about Ireland’s childcare provision.

The NESF report ‘Creating a more inclusive labour market’ (NESF 2006) documented all this – and was ignored. Against this background, it is possible to see that labour immigration was the easy option – just bring in work-ready people, instead of developing universal childcare and supportive labour market activation [4].

Problem #7 Mass immigration can lead to settled ethnic minorities with low labour force participation
New immigrants usually have a higher labour force participation than locals (see earlier re fiscal benefits), but this is unlikely to last. In a recession new immigrants will usually be the first to lose their jobs, simply because they were the most recently hired and/or they have taken jobs that were less protected; there may be straightforward discrimination [5]. If they and their families stay, they become an ethnic minority and the ‘second generation’ is likely to have a higher level of unemployment than the native population.

Especially important here is the issue of female labour force participation. In some ethnic minorities women are significantly less likely to enter the formal labour force than native women. It is important to stress that this is by no means universal. Thus as long ago as 1991 UK census data showed that Afro-Caribbean women were significantly more likely to be economically active and in full-time employment than white women, even after controlling for household structure (Holdsworth and Dale 1997). By contrast, women from Muslim ethnic groups (in the UK Pakistani and Bangladeshi) do continue to have low labour force participation.

To this must be added the ‘left behind’ problem. Newly arrived immigrants go to where the work is. However, if the work dries up, they and their descendants are often less likely to move – the reasons presumably range from fear of discrimination to a reluctance to leave the supportive community they have established. Sections of Europe’s established ethnic minorities are concentrated in decaying industrial areas which they once serviced - most obviously the mill towns of the Northern England, but also the erstwhile coal mining areas of the Ruhr and even the manufacturing towns of France.

This makes clear that it is only new immigrants who will be kind enough to provide the flexible labour force desired by employers and governments. Furthermore, discussing labour force participation highlights that ‘immigrants’ are not homogenous, and even the division between low skill and high skill is inadequate. This becomes especially clear when we consider the alleged economic benefits of diversity.

[1] This may be a gross under-estimate. The most recent ONS release (27 November 2014) reports total net migration to the UK in year-ending June 2014 to be fully 260,000. Annual net migration to the UK peaked in 2005 at 320,000 for year ending June 2005.
[2] A bizarre feature of current work on migration is the extent to which the emigration of Europeans is almost completely unresearched. This despite the fact that emigration from the UK exceeded immigration for much of the post World War II period; since 1970 emigration has usually been in excess of 200,000 per annum; the current excess of immigration over emigration only dates from 1994 (ONS).
[3] There is an emerging consensus that in general skilled labour migration from poor to rich countries is a win/win, benefiting both sending and destination countries (skilled emigrants send remittances, transmit new knowledge etc.). The net benefits however are more dubious in the case of medical professionals.
[4] Obviously childcare and labour market activation cost money. However, they also require an inclusive national ideology and effective state institutions. Arguably during the boom these were weakened in Ireland.
[5] All these factors have combined to ensure that in Ireland NMS immigrants are now more likely to be unemployed than indigenous Irish workers.

Click here for Part 3

You can't benchmark marginal rates of income tax

Cormac Staunton: As reported in the Irish Times, the government is considering introducing “tax benchmarking” for income tax in order to attract emigrants to come home – particularly from Anglophone countries such as the UK, the US, Canada and Australia.

The implication is that our income tax system is a major barrier for people to return to Ireland, particularly for those on average earnings. If this were true (and there is little evidence that it is) it would be very odd; because Ireland has one of the lowest rates of tax on average earnings in the OECD:

So what is going on?

Well, from the Minister's statements there seems to be a focus on reducing the ‘marginal’ rate of tax.

“If you take the tax rate that a young Irish professional or a young Irish building worker pays in London, they won’t go into the higher rate until they are at in excess of £150,000 (€190,000), they go into the higher rate here at €32,800.” (Minister Noonan, Summer 2014)

Comparing marginal rates is the wrong way to compare tax systems. They are only one cog in a huge and complex machine. There can also be significant difference between marginal rates (the ‘headline’ rate) and the effective rate (what you actually pay).

To understand why Ireland's marginal rate appears high while our effective rates are low, and why the highest marginal income tax rate is at average earnings, there are two important considerations to note:

The first is tax credits. In Ireland, credits essentially put a zero rate of tax on the first €16,000 for a single person (more for a married couple with one income). What this means is that if you earn €32,000 a year (and are paid monthly) then each month you essentially pay no tax for the first two weeks, and 20% for the next two weeks. Your marginal rate of income tax is 20%. But your effective rate is 10% (USC and PRSI are added too, but the idea is the same).

It looks like this (2014 data)

Secondly, Ireland only has two rates of income tax (we have more of USC).  Prior to Budget 2015, this meant that the highest marginal rate was at €32,800 (Due to changes in the Budget our highest marginal rate is now at €70,000 - where we have the highest rate of USC). The reason the UK’s marginal rate is higher again is because they have a third rate of income tax on earnings over £150,000. Ireland could introduce a third rate of income tax at €100,000 and the highest marginal rate would then be at three times average earnings.

But the focus seems to be squarely on reducing the marginal rate on the group between €33,800 and €70,000. What we have seen from Budget 2015 is that cutting marginal rates for this group give the greatest benefit for those on the highest incomes (€70,000 and above), not those near the middle.

A tax benchmarking exercise would need to consider the entire range of taxes and focus on effective rates, not marginal. And it should also consider how we are going to fund our public services: which is why we raise taxes in the first place.

If the intention is to make Ireland the lowest tax country on all fronts (we already have the lowest social insurance in the EU) then we need to accept that we will also have the lowest public services.

Having minimal public services, which reduces the quality of life for everyone, is hardly a prospect that will entice young people to return home.

Cormac Staunton is Policy Analyst at TASC. You can follow him on Twitter @Cormac_Staunton

Benchmarking Ireland's Income Tax against the Anglo-Saxon World

Nat O'Connor:
The Irish Times reports that the Government may be considering benchmarking tax on higher earners against what they would pay in the UK, USA, Australia or Canada.

Irish people speak English and we are very much part of the Anglo-Saxon economic 'sphere'. Despite the popularity of spending a year in an EU country as part of the Erasmus scheme for third-level students, many Irish people see the UK, Australia or Canada as a more attractive destination for work than France, Germany or Spain. Ireland's economy is the gateway to the EU for many US multi-nationals, and there is a natural flow of people to and from Ireland within this economic sphere.

Yet, this is an incomplete picture.

In 2013, Ireland's goods exports totaled €14 billion to the UK, €35.5 billion to other EU states and €37 billion to the rest of the world. Goods imports in 2013 were nearly €17 billion from the UK, €15.5 billion from the EU and €17.5 billion from the rest of the world. Trade with the NAFTA countries (USA, Canada and Mexico) constituted nearly 23% of all goods imports and exports in 2013, compared to 41% EU and 14.5% UK. (CSO Trade Statistics, October 2014 - rounded figures).

Trade in services is different, with €16.5 billion exported to the UK in 2013, compared to €10 billion imported. Exports to Germany were €9 billion with less than €3 billion imported. Exports to the USA were €8.5 billion with €22 billion imported and trade with the Netherlands was €3.5 billion of exports and €14.5 billion imported. (CSO International Trade in Services 2013 - rounded figures)

The latter indicates Ireland's role in global finance, where large volumes of trade in financial services do not necessarily indicate a corresponding level of economic activity in terms of employment compared to goods.

Migration statistics also show a mixed picture. For 2014 the CSO estimates 9,700 in-migration from the UK and 8,200 out-migration to the UK, in-migration of 11,200 from the rest of the EU and out-migration of 5,000. In-migration of 7,400 from Australia, Canada and the USA combined, and out-migration of 14,100 from those countries. (CSO migration)

The main point of looking at these statistics is to show that Ireland's strength is that it lies in the overlap between the EU and the Anglo-Saxon economic sphere. While there are major risks to do with Ireland's over-reliance on low corporation tax, Ireland trades with the rest of the EU as much as with the Anglo-Saxon world, and people move to and from EU destinations as much as they do from English-speaking countries.

It is therefore not obvious that we should be aiming to mimic Anglo-Saxon tax policies. Many people living in Ireland are from West European countries or have lived there, and have higher expectations for regulation of the economy and the provision of quality public services than those whose only foreign experience is the UK, US or Australia.

The focus on those earning €32,800 to €70,000 is also disingenuous. They are the top 25% of adults in terms of income, not the middle of the income distribution (see here for example).

Giving them tax cuts will mean that any spare public money will go to those who need it least, diluting public services and denying those who cannot work any increase in their long-frozen weekly payments (see my analysis of Budget 2015 for example).

Market income inequality is rising faster in the Anglo-Saxon sphere, which championed deregulation and the importance of financial services in their economies. Little surprise that the culture of excessive CEO pay and bonuses to bankers (despite tax-funded bailouts) originates in the City of London and Wall Street in New York, although the Netherlands and Frankfurt are major players in financialization too.

Tax cuts for high earners just compounds the inequality already caused by the market. Many West European and Nordic countries face the same pressures of rising pay at the top, but they have managed this by maintaining stronger taxation, social insurance and market regulation. In many cases, West European countries also have far fewer children experiencing material deprivation and more extensive, higher quality public services for all their citizens than Ireland.

If Ireland's tax system was to be benchmarked against EU norms, we would have far, far fewer tax reliefs and tax breaks. Likewise, we would have much higher social insurance, including on low and middle income earners, in order to fund quality public services.

Ireland can benefit from the advantage of trading with both the Anglo-Saxon world and the EU. But we cannot have the 'best' of tax policy from both sides - if that means low tax on everyone - because that means that we will provide extremely weak social protection or public services.

People already pay higher social insurance contributions in the USA than Ireland, and property tax can be up to ten times higher than it is here. The corporation tax rate in the USA is nearly three times higher than the Irish rate.

Ireland is still in a fortunate demographic period of relatively few older people and relatively many young people. But the future costs of health care, social care and pensions alone will require a major increase of taxation.

If the Government wants to lure Irish emigrants back to Ireland, it could do worse than guarantee them that their parents and siblings will have a high quality of life here.

Thursday, 5 February 2015

Immigration: wishful thinking by well-meaning people

This is the first of four blog posts by Professor James Wickham on migration

James Wickham: In an article last December in the Irish Times (‘Extensive research contradicts the UKIP view of immigration to the UK', Irish Times 16.12.2014) John FitzGerald repeats the traditional economic arguments in favour of immigration. It is a good summary of the economic arguments used by the pro-immigration lobby. It also a good example of wishful thinking - people who oppose racism and discrimination seem to feel the need to oppose further restrictions on immigration. They also seem to assume that if it can be shown that there are economic benefits from immigration, this in itself means that immigration is desirable. The argument is thus a mixture of explicit ‘economic’ arguments and usually implicit sociological arguments and, even more deeply buried, moral arguments.

In this series of four blog posts, I try to sort out this muddle. Firstly, I suggest that the arguments for immigration are not so straightforward as FitzGerald claims, largely because it often depends on who actually benefits. Secondly I suggest that FitzGerald’s claims about the benefits of ‘diversity’ are actually extremely dubious. Finally, I argue that there really are moral arguments in favour of certain forms of immigration, and these should be made as such. There are occasions when we should argue for more immigration, without making spurious claims about its benefits.

1. Background: Mass immigration is not inevitable
It is sometimes assumed that mass immigration is inevitable. This is nonsense: immigration rates vary enormously between countries and over time. One major determinant is simply immigration policy – governments can influence immigration rates (emigration rates in a free country are more difficult). The UK case demonstrates this point. The UK had essentially zero or even negative net migration for much of the post WW2 period (emigration exceeded immigration). Indeed, as late as 1994 emigration from the UK exceeded immigration. The major change has been the dramatic increase in immigration post 1996, the result of a series of decisions by New Labour, in particular:
1) relaxing restrictions on family reunification, generating increased flow especially from Pakistan and Bangladesh;
2) facilitating foreign students who worked part-time; and above all
3) along with Ireland and Sweden, opening the labour market immediately to immigration from the New Member States of the EU.

According to most recent figures from the ONS, in the year ending June 2014 net immigration was 260,000, having peaked at fully 320,000 for year ending June 2005 (ONS release, 27 November 2014). These notes therefore refer largely to the UK case.

2. The economic arguments are more complex
Problem #1 An increase in total GDP does not necessarily benefit natives at all
It is sometimes claimed that immigration increases GDP and is therefore ipso facto beneficial. To the extent that any immigrants work in the market economy, this is obvious but surely irrelevant. For members of the existing society the economy of which is being discussed, what matters is not the total size of the economy (the aggregate GDP) but the GDP per capita:

Overall GDP, which the Government has persistently emphasised, is an irrelevant and misleading criterion for assessing the economic impacts of immigration on the UK. The total size of an economy is not an index of prosperity. The focus of analysis should rather be on the effects of immigration on income per head of the resident population (House of Lords 2008: abstract).

Most of FitzGerald’s article does explicitly focus on the ‘per-capita’ increase in GDP and this is what needs discussing.

Problem #2 A gain in average (per capita) GDP may be unequally distributed: the better off may gain, but the poor may actually loose
An increase in the mathematical average GDP does not mean that everyone benefits to the same extent. Some may benefit more than others, and for some there may even be losses. So what is crucial is the distributional consequences.

It is quite clear that the early mass immigration to Western Europe in the ‘trente glorieuse’ of the long post World War II ‘Fordist’ boom occurred when overall living standards were rising and income differentials were narrowing. Whether immigration accentuated or retarded these processes could be discussed, but what really matters is that the situation today is very different. Since the 1970s income inequality has been increasing in virtually all western societies (see for one overview OECD 2011). This is the crucial context for discussion of the economic consequences of immigration.

Initially at least, immigrants compare their wages and their working conditions with what they could have received ‘at home’ rather than with wages and conditions of native workers in their new country. Furthermore, they often see their stay in the new country as temporary, so issues like job security, promotion etc. are of less importance. This ‘dual frame of reference’ (Waldinger and Lichter, 2003) means that immigrants are prepared to accept wages and conditions that might be unacceptable to natives (Ruhs and Anderson, 2010). For this reason, employers often see new immigrants as ‘good workers’ and contrast their ‘work ethic’ favourably to that of the natives (MacKenzie and Forde 2009; Gomberg-Munoz 2010).

In the current context the mass immigration of unskilled workers (or more precisely, of immigrants taking unskilled jobs) undermines wages at the bottom of the income distribution. In the short term this form of mass immigration will, ceteris paribus, therefore make the society more unequal [1].

It may be the case that that over time there is both an overall increase in GDP and that enough of this increase is at the bottom of the income distribution to cancel out the natives’ loss of earnings, but even this does not necessarily cancel out the impact on inequality. In other words, it is possible that everyone may end up better off, but the gap between poor and rich has nonetheless increased. However, in the current context, even this seems unlikely. In the UK and the USA in particular, low paid unskilled work has expanded.

In the UK there are now forms of agricultural production (e.g. strawberry growing) which would be impossible without the new low wage immigrant labour force (Ruhs and Anderson 2010). In the US immigrants fill most manual jobs in agriculture and sections of the food processing industry. Employers – sometimes joined by immigration advocates - argue that American food production can only occur if there is (cheap) immigrant labour. Yet as one researcher comments: ‘History is littered with predictions that there are no alternatives to slaves or guest workers to produce food and fiber’ (Martin 2009: 139). At the most extreme, the new availability of cheap immigrant labour with limited labour rights allows technological regression: the (re-)introduction of less sophisticated technologies, so that the workplaces begin to resemble the work camps of the soviet gulag (Wickham 2011) [2].

Any empirical study of the impact of immigration that focuses only on the impact on average wages will be misleading. Thus an initial review concluded that:

The available evidence suggests that immigration has had a small negative impact on the lowest-paid workers in the UK, and a small positive impact on the earnings of higher-paid workers. Resident workers whose wages have been adversely affected by immigration are likely to include a significant proportion of previous immigrants and workers from ethnic minority groups (House of Lords 2008: 28)

More recent empirical work in economics has disaggregated the impact of immigration and clearly suggests that immigration has different impacts on different groups of wage and salary earners. For the UK, Dustmann et al (2013) show that in the period 1997-2005 immigration led to an overall increase in average wages, but had a negative impact on wages of the lower paid. As they say, immigration has a ‘sizeable negative impact of immigration on the lower wage quantiles’ (160) and again ‘Overall, these results suggest that immigration tends to stretch the wage distribution, particularly below the median' (161). Equally, a recent report by the UK Migration Advisory Committee concludes that ‘Wages for the low-paid may be lowered as a result of [low skill] migration, although…this effect is moderate at the national level but possibly larger in London’ (MAC 2014: 31f).

The claim that immigration brings economic benefits to everybody is therefore no longer universally accepted. Although there is considerable debate in the economics literature, it is clear that those who benefit least from the immigration of more low paid workers are those (including previous immigrants) who are already in low paid jobs.

Problem #3 The fiscal benefits of immigration depend on continuing immigration
New immigrants are almost bound to make a net contribution to the state’s finances (the ‘fiscal benefit’). Because of their age they are more likely to be at work than the host population, so they contribute more in taxes, while they are make fewer claims on the health and other social services (it is those past retirement age that are a bigger ‘burden’).

While this has always been so, now new immigrants bring a further benefit: overall immigrants of working age are better educated than the host population (OECD 2008). Because of their education they are likely to be more productive than the host population and so overall make a bigger economic contribution; because they are better paid they contribute more in taxes and place less demand on social services (fiscal benefit). While the education/productivity argument is often disputed (especially because it assumes that the immigrants are employed at their qualification level), the age/employment argument is universally accepted (see for the UK especially Lisenkova et al, 2013) [3]. In this vein, the recent and frequently cited paper by Dustmann and Fratini (2014) reports that recent immigrants to the UK have been net financial contributors.

However, these gains depend on a continuing inflow of new immigrants. If they stay, immigrants will get older and place their own demands on health and other services. The gains only continue if new young and healthy immigrants arrive and take up jobs. To the extent that older and longer resident immigrants are concentrated in low skill jobs, they are disproportionately at risk of unemployment; some minority ethnic groups also have lower levels of labour market participation than the native population. Thus Dustmann and Fratini also show that those born outside the UK who arrived earlier (‘non-recent immigrants’) are now - like the native born population - a net fiscal charge (Dustmann and Fratini 2014; also MAC 2014:31).

[1] There are possible countervailing factors. For example, during the Irish ‘Celtic Tiger’ boom mass immigration was not restricted to low-skilled jobs. Many immigrants, especially returning Irish emigrants, took well paid jobs, so reducing wage pressure in this area.
[2] The comparison is not fanciful. Ethnographic accounts of Polish workers in low wage British manufacturing report the workers themselves saying ‘This is like a work camp’ – and work camp for Poles has fairly obvious historical connotations (e.g., Wilczek 2012).
[3] Obviously different immigrant groups will make different levels of contribution and incur different levels of cost. A crucial issue is the extent to which immigrants are actually employed and in what sort of jobs. In the UK A10 immigrants have a high level of employment but are concentrated in low skilled – and low paid – jobs. Recent immigrants in low skilled jobs are also especially likely to send remittances home.

Click here for Part 2

Wednesday, 4 February 2015

Aer Lingus Watch #3

Paul Sweeney: The government will not sell its stake in Aer Lingus. Taoiseach said that he wants “a cast iron guarantee” on the slots from IAG. That will not be forthcoming. Case closed (for now).

IAG has now offered what appears to be a short-term 5 year deal on the slots: AG is proposing to offer “legally binding commitments” to the Government and would give it “a role” in securing the future of Aer Lingus.

It proposes “The proposed commitments would ensure that, unless there is explicit Irish Government agreement:
  • Aer Lingus' 23 slot pairs at London Heathrow ("Heathrow Slots"), cannot be sold, including to other IAG airlines;
  • Aer Lingus' name, head office location or place of incorporation in the Republic of Ireland, cannot be changed.
  • In addition, IAG is prepared to offer a further commitment to operate the slots on Irish routes for five years. This is protection that the Government does not have today,” it asserts.
Willie Walsh, IAG CEO promised: "We are committed to maintaining and strengthening Aer Lingus. We want to develop air services that ensure Ireland's connectivity is enhanced. In seeking the support of the Irish Government, we propose to offer it legally binding commitments that go well beyond the protections currently available to it. These commitments would give the Irish Government an important role that they do not have today in securing the future of Aer Lingus."

It promised that “Aer Lingus would operate as a separate business with its own brand,” (worth a fortune) “management and operations,” (considerably slimmed down, no doubt) “continuing to provide connectivity to Ireland”, (while the slots at Heathrow remain in its hands) “while benefitting from the scale of being part of the larger group;” (this is an important point to which I will return in the next post).
  • “Aer Lingus would join the oneworld alliance, of which British Airways and Iberia are key members” (but Aer Lingus was a member of this Alliaance and decided to leave it because it was not working well for the company some years ago. It has tie-ins with various airlines which it would now lose); and
  • “Aer Lingus would join the joint business that IAG operates over the North Atlantic with American Airlines, leveraging the natural traffic flows between Ireland and the US” (to whose advantage – AA’s and BA’s?)

IAG are cleverly also trying to woo local business leaders by extending the short-term veto on the sale or shifting of the slots to the Dublin, Cork and Shannon Chambers of Commerce. All three Chambers would have to vote against any proposal to sell the slots in order to block it, it promises.

It is interesting that IAG is not giving such power of veto to the Dublin, Cork and Limerick Councils of Trade Unions, representing many more local people in each city than the Chambers. But they are only workers' representatives! And such people can be awkward and questioning at times.

It is important to see that there is a sting in the tail of this apparent “generosity”. After five years, i.e. in 2020, the deal is off. IAG said in a statement that it is also prepared to guarantee that the slots would be used to service only Irish routes for five years. The Irish Times says that the group may be prepared to increase that to longer. Clearly IAG can cope with fewer slots for long haul in Heathrow for a few more years.

An unwelcome alternative to IAG walking away would be if IAG buy the remaining 75%, where it would not get control of the slots but it would still pay out a lot for a regional airline. The government’s 25.1% plus another 5% blocks the sale of the slots. As the pilots have around 3% and as other patriots have a bit more, the block on the takeover of the slots remains.

The slots are estimated to be now worth up to €925 million. I had a figure of €400 million which was published in the Sun on Sunday, but it should have been corrected as up to €925 million is the upper bound from a new study by Deloitte.

If the slots are worth say €900 million, IAG's offer of €1.3 billion for Aer Lingus means they would get Aer Lingus for €0, as the company has cash reserves of €400 million!

The transatlantic route between Europe and North America is the most profitable aviation market in the world. BA is one of the biggest operators on these lucrative routes. It wants to be bigger on them. Aer Lingus provides a great opportunity to grow from Heathrow, one of the most profitable of all hubs.

In 2012, Ryanair told the European Commission that if it was allowed to take over Aer Lingus, it would sell 20 of Aer Lingus's 24 landing slots at Heathrow to British Airways. The company would do anything to get such clearance to take over Aer Lingus as then it would have a virtual monopoly in Ireland. That is what commercial companies will do. Fortunately there are competition rules which are now enforced [see NOTE below]. It is worth saying that many people have noticed that the low fares are more difficult to find in the past 6-9 months and this is reflected in the bulging bottom line of Ryanair.

I suggested in my last blog post that the Government up its stake in the company to 40%. A better idea comes from right-wing commentator and TD, Shane Ross, who, reading the popular mood, wants the government to keep its stake. Indeed he says Ryanair will be selling its 29% share and reducing it to around 5% because London is ordering it to do so on competition ground (where was our Competition Authority on this? Too busy chasing voice-over actors and freelance journalists for being in unions and so distorting competition!). Ross suggests the government buy the Ryanair stake and raise the state’s ownership stake to 55%. Ryanair holds 159,231,025 shares or 29.82% of the company.

This makes sense. The Government should buy at least 50.1%. If the government can invest vast sums of taxpayers’ money in bankrupt banks, it makes far better sense to invest in strategic infrastructure like our own aviation bridge to UK, rest of Europe and the US.

Interesting, last week as IAG was stalking Aer Lingus, Qatar Airways acquired a 9.99 per cent stake in it. Commenting on the share acquisition, Willie Walsh, IAG chief executive, said: "We're delighted to have Qatar Airways, one of the world's premier airlines, as a long term supportive shareholder. We will talk to them about what opportunities exist to work more closely together and further IAG's ambitions as the leading global airline group".

The predator is now stalked!

Etihad, another of the three rapidly expanding and state-controlled Middle Eastern airlines also has many stakes in other airlines, including Aer Lingus. Indeed its stake in Aer Lingus is its smallest at 4%. It also has 49% of Alitalia, 49% of Air Serbia, 29% of Air Berlin and 22% of Jet and 22% of Virgin Atlantic and 40% of Air Seychelles.

The biggest of the three is Emirates which has no stakes in other airlines, and which is growing rapidly organically so far. Qatar’s 10% of IAG - and thus BA and Iberia - is its first step towards ownership of other airlines. IAG do not pay dividends so Qatar is investing for reasons other than cash flow. EU rules prevent any non EU company from having more than 49% of an EU airline. Free marketeers and right-wingers want to change this rule.

Qatar Investment Holdings owns 20% of Heathrow Airport and its boss sits on the board. It actually owns the slots that we talk about which are traded on a grey market by those who hold them. Will Qatar be compromised with its holdings in both IAG the biggest customer of Heathrow and the airport?

These airlines have severely challenged the big European carriers on the profitable Europe-Asia long haul routes. They have vast, state-backed resources. The state is seen as an undesirable owner by ideologues in Ireland, UK and the US, but not in the rest of world.

It would be ironic if eventually Aer Lingus is fully privatised and eventually ends up state-owned, but by a Gulf state!

Aer Lingus may be only a regional airline but it happens to be our region which is also our island country, a point to be examined in the next Aer Lingus Watch.

NOTE: Aer Lingus was the first airline to exploit the liberalisation of what was incredibly tight nationalistic airline regulation in Europe. The new EU liberalisation measure was called Fifth Freedom Rights and it allowed an airline from one country to pick up passengers in another and bring them on to a third country in Europe. Aer Lingus did this from Dublin to Manchester to Amsterdam and I think from Dublin to Heathrow to Paris. In each case, KLM and BA stepped in with uneconomically low fares until the much smaller Aer Lingus was forced to abandon both of the new routes. The EU would have taken years to take action at that time to investigate abuse of dominant position. Governments also set all fares and did not like them to be reduced – only increased! Happily such bullying is no only illegal but now the rules are enforced.